An interesting point from Michael Arrington via Blackfriar’s Marketing:

The economics of recorded music are fairly simple. Marginal production costs are zero: Like software, it doesn’t cost anything to produce another digital copy that is just as good as the original as soon as the first copy exists, and anyone can create those copies (meaning there is perfect competition and zero barriers to entry).

That’s an excellent point concerning “intellectual property”: so long as it is sold electronically, so that not even distribution or packaging costs come in, the cost of production is close to zero. Now, with software, there is a mitigating factor: the cost of producing the original, which can be pretty damned high in some cases, and so the cost must be offset by multiple sales and/or high pricing.

Music, on the other hand, costs somewhat less to produce. Yes, costs for studio recording and so forth can be fairly high, but in the end, the average song must cost far less to produce than the average software package churned out by a company.

In the past, there was more respect for the costs of intellectual property because of the physical nature of the product; there was a book, a record, a CD–some physical product that had to be manufactured, and held in one’s hand. A consumer could feel they were getting value, or additional value, because of this. With electronic transmission–a very new development–that physical component no longer needs to matter.

And so producers suddenly have a commodity that can be reproduced at zero cost and costs nothing to distribute. The problem is, they still expect to price and police the system as if there were a physical product involved. And that’s where part of the intellectual disconnect comes in.

Imagine that a farmer who sells oranges suddenly finds that a machine has been made that can take an orange and reproduce it at zero cost. Initially he is ecstatic, as he sees his production costs fall drastically, but he can still charge as much for the product as he did when he grew each orange from the soil.

Then the technology for replicating oranges falls into the hands of his customers, and they no longer need the farmer after the first orange is produced.

True, the analogy is not perfect; software and songs are not oranges in that each product is unique; one will not simply get one piece of software or one song and then reproduce it forever. But there is enough to the analogy to realize that new technology requires new paradigms for the marketplace. Piracy and the RIAA/MPAA’s reaction to them are part of the process of coming to a new equilibrium.

The content owners are fighting like mad to maintain the old system, and keeping all the gains of technology for themselves; they use their money, power, and influence in government circles to win this battle.

Piracy is the consumer’s reaction, essentially saying, “Oh, no you don’t!” and often going to the other extreme, trying to claim all the benefits of the new technology for themselves; they use their numbers, anonymity, and civil rights legislation to fight their side.

Coming to a settlement will, like all settlements, involve both extremes to agree to a place that neither likes. Where that settlement will land is anyone’s guess right now.